Deep value, contrarian, and Grahamite investment

Soapstone Networks Inc (NASDAQ:SOAP)

Soapstone Networks Inc (NASDAQ:SOAP) is a net cash stock with an activist investor, Mithras Capital, disclosing an 8.7% holding in October last year. At its $2.50 close Friday, SOAP has a market capitalization of $37.1M. We estimate the company’s net cash value to be almost 150% higher at $91.2M or $6.15 per share. We’re adding it to the Greenbackd Portfolio.

SOAP’s cash flow from operating activities has decreased over the last four quarters from $28.9M in the December 2007 quarter to -$5.96M in the most recent quarter as it has exited its router business (described in the company’s most recent 10Q). Over the same period, revenue decreased from $44.9M to $2.3M, and operating expense dropped from $14.9M to $8.9M. The company’s balance sheet value is now almost wholly cash (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

In the second quarter of 2007, SOAP paid a special cash dividend of $28.3 million or $2.00 per share. Even after paying the dividend SOAP’s balance sheet value is still predominantly cash in the amount of $98.1M. Deducting its total liabilities of $6.9M, we estimate SOAP’s net cash value to be $91.2M or $6.15 per share. The company is now largely a cash box with little ongoing business.

Off-balance sheet arrangements and Contractual obligations

At September 30, 2008, SOAP did not have any off-balance-sheet arrangements and its contractual obligations, which consist entirely of operating leases, were $4.3M. These operating lease payments are the minimum lease payments under SOAP’s non-cancellable operating leases. SOAP treats payments made under its operating leases as rent expense for the facilities, including its head office.

The catalyst

Mark Nelson filed a 13D notice on behalf of Mithras Capital on October 1 last year. You might recognise Nelson from his vocal support of Microsoft’s bid to acquire Yahoo Inc (NASDAQ:YHOO) last year (you can see his Seeking Alpha articles on the subject here and here). While Nelson has not disclosed his intentions for SOAP, his YHOO campaign demonstrates that he is a strong advocate for boards properly exercising their fiduciary duty to stockholders. We think he should be a good bet to wring some value from SOAP.

Conclusion

SOAP is one of the most deeply discounted net cash stocks we’ve come across. The company has a market capitalization of just $37M based on its Friday close of $2.50 against a net cash value some 146% higher at $91.2M or $6.15 per share. Its ongoing business is small in comparison to its net cash position, so it shouldn’t dissipate its cash any time soon. It has no off-balance sheet arrangements, little in the way of ongoing contractual obligations and no material litigation, so the cash position seems reasonably certain. We think Nelson should be able to unlock that cash value. One simple way to do so: SOAP should pay another special dividend. We’re adding it to the Greenbackd Portfolio.

SOAP closed Friday at $2.50.

The S&P500 Index closed Friday at 825.88.

[Full Disclosure: We do not have a holding in SOAP. We now have a holding in SOAP. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]